Comment

Tax on posh goods won't narrow the rich-poor gap

(China Daily)
Updated: 2010-04-23 07:55

China's market for luxury goods grew 12 percent in 2009, reaching $9.6 billion and accounting for 27.5 percent of the global market share, according to a recent report by Bain & Co, a management consulting firm.

Within five years, the Chinese market for pricey products could reach $14.6 billion, ranking it top of the global consumption of luxury goods.

In response, many experts rekindled a push to impose an extra tax on some luxury goods to address the unfair distribution of social resources "to a certain extent".

The disparity between the rich and the poor in China has become an important factor impacting social stability. It is unquestioned that this knot, which harms social harmony and development, must be unraveled.

The big question is whether the taxation of luxury goods is a good idea. Would it address the symptoms of income disparity or tackle its root causes?

Undoubtedly, some industries, departments and interest groups use the resources they have monopolized for huge profits. That results in a decrease in the public share of resources. Also, a low personal income tax threshold means high-income individuals pay a relatively small proportion of their income in taxes. This, along with their nontransparent high incomes and unsound supervision, auditing and personal credit systems, has changed the very nature of taxation - which was ostensibly to take more from the rich to help the poor. In reality, people who make more give less.

Still, imposing a luxury tax won't solve the problem.

First, luxury goods are also commercial products, items with high added values. These products are not just a way to show off one's wealth; they also create considerable job opportunities for the working class. If a luxury tax is imposed to address the disparity between the rich and the poor, the rich only need to give up buying luxury goods in China and go shopping overseas to continue their extravagant lifestyles.

A shrinking market for luxury products and associated industries in the country would only make more middle- and low-income earners lose their jobs, which consequently would widen the gap between the rich and the poor.

If wealthy people succumb and give up those luxury goods, will low-income individuals really gain even one cent of benefit?

The definition of luxury goods is confusing. The luxury goods listed by some scholars include luxury houses and branded cars, furniture, watches and cosmetics. But what exactly is a "branded car" or " high-class food and beverage"?

Moreover, the unfair distribution of social resources in China is largely associated with power, thus those who should be most regulated usually have more ways and resources to avoid the tax. For example, "top-grade leisure" could be disguised as office expenses and "luxurious entertainment" as business trips. While ordinary people who occasionally buy posh goods would be most impacted by the luxury taxation and must pay more.

It's obvious that narrowing the rich-poor gap is imperative. However, levies on luxury goods is a bad idea that neither provide temporary solution to the problem nor get at the root of the problem. The solution to the unfairness in social distribution is preventing monopoly industries from making excessive profits and strengthening the leverage of personal income taxation.

(Excerpts from a comment that first appeared in the Beijing News on April 21.)